On September 28, 2014, Governor Jerry Brown announced the signing of Assembly Bill 1897, which amends Labor Code section 2810 by creating a new Labor Code section 2810.3.

The new law targets businesses that obtain or are provided “workers to perform labor within its usual course of business from a labor contractor.” The statute’s definition of “labor contractor” excludes bona fide nonprofits, bona fide labor organizations, apprenticeship programs, hiring halls operated pursuant to a collective bargaining agreement, and motion picture payroll services companies.

Once AB 1897 becomes effective, private employers will be unable to deny liability for labor contractor’s failure to pay all required wages^[1] or to secure valid workers’ compensation coverage for contract workers.  Employers using the labor services will now “share with the labor contractor all civil legal responsibility and civil liability for all workers supplied” to the company.  This liability is imposed without consideration for whether the business had knowledge about the purported violations and irrespective of whether the client employer and labor contractor are joint employers.  The statute expressly provides that it does not limit any other theories of liability or requirements established by other statutes or common law.

As a result, employers should be especially cautious in selecting a staffing agency. Companies intending to use labor contractors should evaluate the agency before partnering with it to determine whether the contractor complies with all relevant labor laws. Contracts for labor services should now be entered in with an eye towards limiting the risk of retaining non-compliant contractors.

Aside from performing careful due diligence prior to retaining labor services, there are some practical steps a business can take to minimize its exposure under the new law. While the statute provides that any waiver is contrary to public policy and is unenforceable, a company may contract with a staffing agency for indemnification for the agency’s failure to pay required wages or secure valid workers’ compensation coverage. Thus, it will be important for employers to revise labor service contracts to protect their interests against failures of staffing agencies to comply with the Labor Code.

Current law already prohibits employers from entering into a contract for labor or services with a construction, farm labor, garment, janitorial, security guard, or warehouse contractor, if the employer knows or should know that the agreement does not include sufficient funds. However, the new law is designed to extend liability to employers in nearly all industries for a labor contractor’s failure to pay wages or provide adequate workers compensation. The statute exempts the following from coverage:

• A business with fewer than 25 workers (which includes “those hired directly by the client employer and those obtained from, or provided by, any labor contractor”);

• A business with five or fewer workers supplied by a labor contractor or labor contractors at any given time; and

• The state or any political subdivision of the state, including any city, county, city and county, or special district.^[2]

AB 1897 goes into effect on January 1, 2015.

_{[1]  The statute provides that the term “wages” shall have the same meaning provided by Section 200 and “and all sums payable to an employee or the state based upon any failure to pay wages, as provided by law.”  Labor Code section 200 in turn defines “wages” as including “all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.}

_{[2]  AB 1897 was revised significantly from when it was originally proposed.  All these exemptions were added through revisions.  Also, the enacted version removed language that would have created shared liability for “[t]he failure to report and pay all required employer contributions, worker contributions, and personal income tax withholdings as required by the Unemployment Insurance Code.”}